Mats Persson is Director of Open Europe, a think-tank with offices in London and Brussels, and an advisory board member of Open Europe Berlin.

Why you can't inflate away the eurozone's troubles

According to some accounts, in 1920, a Berlin bus ticket cost 11 marks. On November 22 1923, the same bus ticket had risen to 1.2 trillion. By the afternoon of November 23 it cost a mind-boggling 4.8 trillion. The hyperinflation that hit Weimar Germany in the 1920s wiped out the savings of every prudent German citizen – and reduced the country’s political class to an utter wreck. The rest is terrifying political history.

You can hardly blame the Germans for fearing cheap money and inflation – a fear which runs incredibly deep. Consider, for example, that while British tabloids splash their front pages with celebrity gossip and The X Factor, the tabloid Bild, Germany’s (and Europe’s) biggest-selling paper, leads with huge pieces on the political independence of the ECB, in appeals against inflation. Needless to say, the comments over the weekend by French President Nicolas Sarkozy that, if re-elected President, he would reopen “the debate on the role of the Central Bank in supporting growth”, ie on printing money and/or taking on a higher inflation target, have not gone down well in Germany.

Your typical Anglo-Saxon analysis usually concludes that the most feasible "solution" to the euro crisis is for the ECB to create more money, in one way or another. In addition to the ECB playing the role of lender of last resort, the analysis has it, a healthy dose of ECB-controlled inflation is exactly what the eurozone needs. The desired mechanisms for achieving this vary, from the ECB adopting a higher inflation target and keeping rates low for some time to buying more government bonds or even simply printing money, akin to Fed-style quantitative easing. If the ECB followed this policy, so the logic goes, German wages would rise faster than in struggling eurozone countries, meaning that Spain, Italy and others will need less "internal devaluation" (ie less pain and therefore more politically palatable) to regain competitiveness.

There is truth in this, in particular that greater demand in Germany would be most helpful in easing some of the ruinous imbalances between weak and strong countries in the eurozone. But it’s also simplistic. And the German opposition to inflation isn't merely based on traumatic historical memories, but also fully rational arguments.

First, call it what you like, but unleashing inflation ultimately acts as a massive transfer from the prudent savers in Germany to the debtors (both private and public) in southern Europe. Incidentally, it will hit the poorest Germans by far the hardest, as inflation would eat away their savings, pensions and income to a proportionally greater extent. In that sense, an inflationary "transfer" is highly regressive – adding another element to the already complicated and sensitive discussion about inflation.

But, economically, ECB-induced inflation would not present a long-term solution to the eurozone’s ills by any means. Although the initial effect would be make adjustment in the struggling countries easier, the eurozone would remain split into at least two parts running at very different speeds. What happens after the initial boost in demand, as the transfer is, per definition, time limited? Sure, there’s a chance that struggling eurozone countries use the time bought effectively to really reform their economies. However, on current evidence, a more likely outcome is some reform, but that the imbalances remain. Would the ECB then continue to spray money on the Continent to keep the party going?

In addition, such massive ECB intervention also sets the scene for further boom and busts in Europe, which again threatens confidence in the system. Fears of a housing bubble are already doing the rounds in Germany. In reality, maintaining a 4pc – 5pc target could actually turn out to be substantially more difficult than a 2pc one, as people would naturally expect inflation to increase even further (managing inflation expectations is an absolutely vital task of central banks). Even if a higher average level of eurozone inflation were achievable the level needed in Germany to balance this out would likely be too high to be economically acceptable. Furthermore, the transition would be incredibly tricky as people’s expectations take time to adjust to the new "normal", possibly increasing volatility or even feeding through to wage pressure (and other second round inflationary effects).

Politically, such a change is very unlikely as long as the ghost of Weimar looms large over Germany. But if ever the Bundesbank is outvoted, beware what you wish for. If the perception is that the ECB is really turning into a “bad bank” that actively pursues inflation, that would be one of the few scenarios under which German support for the entire euro project really could evaporate.